(Adds quotes, economic data, updates prices)
By Karen Brettell
NEW YORK, Nov 20 (Reuters) - The U.S. dollar dipped from a seven-year high against the yen on Thursday as stocks gained, pausing a rally that has sent the greenback up by almost 10 percent in three weeks, though many see the U.S. currency on track for further gains.
The yen has weakened since the Bank of Japan last month shocked markets with further monetary easing. The dollar rose as high as 118.96 yen in overnight trading, the highest since August 2007, and last traded at 118.01 yen.
The divergence of a strengthening U.S. economy and weakness in Japan has many traders expecting the dollar rally to resume.
“The trend is very, very strong,” said Sebastien Galy, senior foreign exchange analyst at Societe Generale in New York, noting investors are likely to continue pulling assets out of Japan. “Dollar/yen will continue to be a buy on dips, the carry trade will get even more extended.”
Strong U.S. economic data on Thursday added to confidence the Federal Reserve is on course to begin raising interest rates next year.
The greenback posted brief gains after the U.S. Labor Department reported the core Consumer Price Index, which strips out food and energy prices, rose 0.2 percent last month.
“At a time when everyone is fretting about disinflation risk, and the Fed suggested they were getting a bit worried about it in their minutes yesterday, to get a 0.2 percent on the core is reassuring,” said Richard Franulovich, a senior currency strategist at Westpac Securities in New York.
Minutes of the U.S. central bank’s October meeting released on Wednesday indicated a vigorous debate over how much weight to give to signs that inflation expectations were slipping.
Other data on Thursday showed rising home resales in October and expanding factory activity in the mid-Atlantic region in November.
The euro slipped after purchasing managers’ surveys from the euro zone showed business growth was weaker than forecasters expected this month, underpinning expectations that monetary conditions will be eased further in the 18-nation bloc.
The euro fell to $1.2505 after the euro zone data and was last trading at $1.2546.
Additional reporting by Jemima Kelly in London; Editing by Chizu Nomiyama and Chris Reese